Appraisal Terms

CAMA - Computer Assisted Mass Appraisal

Cap Rate  (Capitalization Rate) a rate used to convert income to value

Capital Expenditure  Investment of cash or the creation of liability to acquire or improve an asset, e.g. land, buildings, building additions, site improvements, machinery, equipment; as distinguished from cash outflows for expense items that are normally considered part of the current period's operations

Direct Capitalization  A method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, either by dividing the income estimate by the appropriate are or by multiplying the income estimate by an appropriate factor. Also, a capitalization technique that employes capitalization rates and multipliers extracted from sales.

Economic Rent  A term sometimes used as a synonym for market rent.  The rent to estimate income to a rental property it would produce in a free and open market

Effective Gross Income  The anticipated income from all operations of real property after an allowance is made for vacancy and collection losses.  Effective gross income includes items constituting other income such as income from operating the real property that is not derived from space rental (for example, parking rental or vending machine income).

Management Fee  An expense item representing the sum paid or the value of management services; a variable operating expense which is usually expressed as a percentage of effective gross income.

Market Approach  The market approach is one of the three major methods of appraising property; it bases estimates of value on information from actual sales of comparable properties. Included under the general heading of market approach are the

comparable sales method, the stock-and-debt approach, the development method, allocation abstraction, allocation by ratio, and the gross rent multiplier method.

Net Annual Income  The amount generated by a property after subtracting vacancy and collection loss, adding non-primary income, and subtracting all expenses required to maintain the property for its intended use.  The expense includes management fees, reserves for replacement, maintenance,  property taxes,  and insurance.  They do not include debt service, reserved for building additions, or income tax.

Operating Expenses  The periodic expenditures necessary to maintain the real property and continue production of the effective gross income, assuming prudent and competent management. The total cost of all goods and services necessary to operate a business profitably.  They do not include nonessential expenses, such as expenditures for expansion.

Physical Depreciation  The loss in property value from ordinary wear and tear or more severe problems such as rotting, sagging, or cracking. Physical depreciation may be curable or incurable.
 

Physical Deterioration  An element of depreciation; loss in value caused by wear, tear, age, and use. (Curable Physical Deterioration; Incurable Physical Deterioration; long­ lived items; short-lived items.)

Replacement Allowance  An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the building's economic life.

Reserve for Replacement  An expense in a property's annual operating statement. These reserves create a fund with which to replace short-lived items (such as stoves, refrigerator, carpeting, or air conditioning) necessary to sustain an income stream

Safe Rate  A safe rate gives the interest an investor can obtain an investment with maximum safety and minimum risk. Usually, the safe rate is assumed to equal the interest rate on 90-day treasury bills plus the minimum rate of return on invested capital.

Theoretically, the difference between the total rate of return and the safe rate is

considered a premium to compensate the investor for risk, the burden of management, and the illiquidity of the capital invested; also called riskless rate or relatively riskless rate.

Secondary Income  All money an owner receives from income-producing property that does not come from the property's primary business function.  Revenue from soft-drink machines or coin-operated laundry facilities is a common form of secondary income. An appraiser using the income approach must add secondary income to normal gross income before going on to calculate net annual income

Vacancy and Collection Loss  The amount of money deducted from potential annual gross income to reflect th·e effect of probable vacancy and turnover, or nonpayment of

rent by tenants. Vacancy and collection loss is commonly expressed as a percentage of potential annual gross income, and it should be based on market research, not on the actual rental history of a property.

Variable Operating Expenses  Expenses that change with occupancy or the intensity of a property's use and are essential to the continued operation of an income-producing property. In the income approach, these expenses are subtracted from effective gross annual income.

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